08/07/2022
3 Reasons We Added Energy Yesterday, July 6
Supply
OPEC pronouncements on output goals and gyrations have become close to meaningless. Only UAE and Saudi have extra capacity, while other producers like Libya and Ecuador are at periodic risk of severe shortfalls as political protests shut in production. Russian supply should be gradually degraded by sanctions. Most importantly, the clock is ticking on US reserve draws of 1M barrels a day–we have about 25 weeks or so to go. This should begin to loom large in market thinking.
Demand
Yesterday’s ISM numbers were better than expected. Durable goods were at expectations, and factory orders were above expectations–that’s this week’s data so far. We have no quarrel with those who say economic growth will slow, but recession talk, to us, seems more than priced into oil. China has announced a potential surge in bond issuance to pay for more stimulus.
Psychology
For every investor, there are times when prices so clearly diverge from your fundamental view that you have to decide whether you were wrong or other factors are at play, and to do so in an unemotional way. As in any episode of sharp price movements, the market narrative has started to become shaped by pricing rather than data. Clearly, energy sector positioning was extremely crowded, and the recession driver took over from the inflation driver. That positioning seems nicely washed out. We don’t see a reason to meaningfully change a view.
We used two instruments to express our energy view, available to interested readers in the paid version of the newsletter.
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